The notion of strategy in organizations - Essay Example

2 Strategy (total 5 pages) 2 1 Definition of strategy Various researchers and have tried to define strategy based on the meaning theyderive out of the term. Mintzberg and Quinn, discuss of strategy as a plan and they specified two essential characteristics of strategy – it is made in advance of the actions that is undertaken and it is devised purposefully and consciously1. Mintzberg emphasizes that a single definition of strategy is not possible. In addition to planning, Mintzberg also sees strategy as a as a ‘Ploy’, ‘Position’, ‘Perspective’ and ‘Pattern’. According to Porter2 strategy rests on unique activities and to be sustainable, the strategic position requires trade-off. Strategy as a Plan or Ploy The term plan is common to different fields when it comes to strategy formulation. For instance, in the military, strategy is to draft a plan while in Game theory a complete plan is necessary to determine the choices the players will make. The dictionary too describes strategy as a plan and in management it is an integrated plan to achieve the organizational objectives. Mintzberg3 contends that a strategy can be a ploy too. To discourage a competitor when an organization expands its plant capacity, it can be termed as a ploy. Since it is meant as a threat, it cannot be called a plan; it is a ploy with a specific intention. Strategy as a pattern According to this definition strategy is consistency in behaviour and has a set pattern, whether or no intended. Patterns can appear without pre-conception but people can observe a set behaviour in an organization and call it a strategy. This may be just an assumption. A plan can be an intended strategy where as a pattern can be called a realized strategy, since it was not intended. Thus, when the intended strategy is realized, it is a deliberate strategy as the intentions existed. Emergent strategies are those that went unrealized where the patterns developed in the absence of intentions or perhaps despite them. Strategy as a position The fourth definition is that strategy is a position. It is a means of locating an organization within the industry environment. This definition suggests that strategy is a mediating force between the organization and the environment. Mintzberg finds this definition compatible with all the previous ones. The concept of strategy need not be based on rational planning or even-conscious decision making assumptions. Strategy as a position can have many players against strategy as a ploy which generally would not have more than two players. Strategy as a perspective This suggests that strategy is an ingrained way of perceiving the world. This definition looks within the organization. Strategy is a concept that exists in the minds of the interested parties. Strategy cannot be touched; it can only be envisaged. It is an invention or a figment of imagination. However, a perspective is shared by the members of an organization. All the definitions of strategy are inter-related. As a plan, strategy deals with how leaders establish direction while as a ploy it takes into account how to handle competition. As a pattern, strategy introduces a consistent pattern of action and as a position it encourages the members to look at the competitive environments. As a perspective, the focus is on reflection and actions of the collectivity. This definition of strategy refers to the “organizational mind” says Mintzberg and is the most appropriate definition. 2.1.2 Levels of strategy in an organization Strategy can be formulated on three different levels – the corporate level (which encompasses vision, corporate goals and philosophy and culture), the business unit level (deals with business goals, mission and competencies) and the functional or department level4. The functional level strategy is concerned with the different departments such as finance, marketing, information system, human resources, manufacturing and research and development. This is represented in the Figure I below: Figure I Source: StrategyWeb (n.d.). The corporate level strategy deals with reach – where the responsibilities are defined, the types of business that the organization would be involved in and the way in which the business will be conducted5. It also deals with management practices where it is decided how the business units would be governed – whether through direct corporate intervention or through decentralization where reliance is on persuasion and rewards. Managing business interrelationships is another function at this level where the corporate strategy seeks to develop synergies across different units by sharing staff and other resources. It also defines the competitive contact where the corporation contact is to be localized. The business unit level strategy deals with a particular product line or a unit and is more about positing the unit against competitors. It anticipates changes in demand and technologies and influences the nature of competition through strategic action. Porter has identified three generic strategies (cost leadership, differentiation and focus). The functional level strategy deals with the different departments within the organization. These are related to the business processes and the value chain. There has to be coordination of resources between the departments so that each unit can execute its functions effectively and efficiently. From this level inputs for the other levels of strategy are obtained. They provide information on resources and capabilities on which the higher levels base their strategy. 2.1.3 Elements of strategy (analysis, choice, implementation) The process of strategy formulation first involves the strategic analysis followed by a strategic choice and then the implementation. There are generally two main phases – formulation and implementation6. Strategic analysis entails defining the organizational purpose. This may be in the form of a mission statement and some organizations also define the values to which they wish to subscribe. This is followed by an analysis of both the external and internal environment. The external environment includes the general and the competitive forces while the internal environment includes the core competencies, the resources, and the stakeholder expectations. Strategic choice includes articulating the objectives in precise detail which helps in monitoring performance. The strategies to achieve the objectives are then described. This is done after evaluating alternative strategic options. Strategy implementation involves the action and monitoring and controlling the process. The operational activities and tasks have to be specified so that strategies can be effectively implemented. The performance and progress have to be monitored to ensure that the objectives are being achieved. As the external environment keeps changing, the strategy process is cyclical. Any change in the environment entails new strategy based on new assumptions. 2.1.4 Environment (contextual/contractual, turbulent) 2.1.5 Creation of strategy development – values/mission/objectives Planning is meant to improve one’s condition including market share and profits7. However, the purpose of planning is not merely to plan but to make a change. It has to move from strategy formulation to strategy implementation. 2.2 Strategic Analysis Strategic analysis plays a critical role in analyzing business environment. This is because the business environment has become turbulent and uncertain. Companies need to keep changing their strategies as the situation changes or demands. Strategic analysis helps to be prepared for the future twists and turns and to devise mechanisms to handle the turbulent situations that may arise8. Strategic analysis can be conducted through different tools at the three levels – the corporate level, the business unit level and the functional level. Setting a strategy requires the knowledge of the customers, competencies and the competition9 as shown in Figure II. An analysis of the tree is interrelated and is used for different purposes at different points of time. Figure II Strategic analysis requires the use of several tools but there is limited use of these tools. Tools and techniques are essential because they help the SMEs to change their course of action depending on the data collected through these tools. Tools and techniques do not help or make a strategy but they are useful in collecting and presenting data which help in strategic analysis10. The most used tool is the financial analysis followed by PEST or STEP analysis, Porter’s five forces analysis and analysis of critical success factors (CSF). External analysis, considered a part of SWOT analysis ranked sixth in popularity, in a study conducted by Aldehayyat and Anchor11. The study found that respondents were aware of other tools such as value chain analysis, competition analysis and portfolio analysis, but none used them. Other tools for strategy analysis such as organizational culture, core capability and experience curve analysis were not even known by the respondents. 2.2.1 Porter’s Five Forces Model The five competitive forces that shape strategy (Figure III) include the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, rivalry among existing competitors and the threat of substitute products12. He further clarifies that these five forces differ by industry. If the forces are intense, the return on investment is low; if the forces are benign, the profit margins are high. The strongest competitive force determines profits and is important for strategy formulation. This is helpful to analyze the situation both at the corporate level and the business unit level. Figure III Threat of entry New entrants bring new capacity and the threat of entry limits the potential of profits for the existing incumbents in the industry. The threat of entry depends on the barriers that are present and serve as advantage to the existing incumbents. These include supply side economies of scale (larger volumes enjoy lower cost per unit), demand-side benefits of scale (discourage new entrants as customers not willing to switch brand), customer-switching costs (larger the costs, harder for the new entrant to gain customers), huge capital requirements, unequal access to distribution channels and government restrictive policies. The power of suppliers Companies have to depend upon a large number of suppliers for inputs and powerful suppliers can capture value for themselves by charging higher prices. When suppliers offer differentiated products or when there is no substitute available, the supplier group becomes powerful. The power of buyers A customer group has negotiating leverage when there are few buyers or when each one purchases in volumes as a single vendor. When the switching costs are low, customer can demand their own price and quality. The power of buyers further increases when they are under pressure to cut down expenses as in recession. The threat of substitutes Firms that offer similar products or services at the same prices are threats. If the threat of substitutes is high, the industry profitability suffers. During such times an organization has to differentiate itself from substitute through marketing or product differentiation. Rivalry among existing competitors This may lead to new product introduction, price wars, advertising campaigns and service improvements. These occur when the industry growth is slow or when there are too many organizations in the same industry or when exit barriers are high. Price wars can be destructive and the organization should try to differentiate itself on some ground. Porter contends that understanding the five forces is only the starting point for developing a strategy. It helps to understand the business environment and the competition areas. This can aid the managers to take strategic action and better position the company. 2.2.2 Value chain analysis Introduced by Porter, the concept of value chain (Figure IV) emphasizes both internal and external linkages in the creation of value in the organizations13. The primary activities in the value chain include: inbound logistics; operations (production); outbound logistics; marketing, sales; and service. The support activities include infrastructure; human resource management; technology development; and procurement. Support activities are particularly important in the service sector where they can add value. The value chain reveals the value of collaboration within a value network and is ideal for a business unit level strategy analysis. Figure IV Source: (Williams & Lewis (2008) 2.2.3 Stakeholder mapping Stakeholders are individuals or groups of people that can influence the firm and can either create or hinder creation of value to the firm. The stakeholder theory lays emphasis on the internal resources of the firm. Stakeholder mapping (Figure V) assists in the evaluation and management of network of stakeholders14. The actors are categorized in terms of their level of interest and their level of power. This is a dynamic model and the relative position of the stakeholders may change. This is used for corporate level strategic analysis. Figure V Source: (Williams & Lewis (2008). 2.2.4 Porter’s Diamond Model To determine the choice of entry mode, Porter’s Diamond Model (Figure VI) offers a dynamic and evolutionary view of the creation of firm advantage based on a number of traditions. It is based on the industrial organizational economics and resource based theory.15 The four determinants include the factor conditions (the quality of human resources and infrastructure of the destination country), demand conditions (the strength of the demand in the domestic market), related and supporting industries (suppliers that may themselves be internationally competitive) and firm strategy, structure and rivalry (domestic competition and how business is established and organized in that country). This is quite in line with Porter’s five forces strategy because the demand conditions demonstrate the bargaining power of the buyers, the factor conditions are the bargaining power of the suppliers. The role of supporting industries refers to the threat of substitutes while the firm strategy indicates the threat of new entrants. Figure VI 2.2.5 PEST analysis PEST analysis helps scanning the external environment and is the acronym for Political/Economic/ Social/Technological environment – all of which are external to the organization. The political factors include the government laws and regulations, the tax policies, the labour laws, trade restrictions and tariffs and the political stability16. The economic factors refer to the exchange rate which influences the international trading, the inflation rate, the interest rate and the economic growth. The social factors include the age, demographics, the lifestyle and career attitudes, the population growth rate and the health consciousness of the society. The technological factors include the pace of technological change, the research and development, the technology incentives and the process of automation. 2.2.6 SWOT Analysis This helps to scan both the external and the internal environment and helps to match the firm’s resources and capabilities to the competitive environment in which it operates17. While strengths can range from patent to brand name to reputation or cost advantages, weaknesses can range from high cost structure and a tarnished image to lack of distribution channels. The analysis helps to understand the available oppurtunities and be prepared for the threats. Figure VII 2.2.7 Ansoff’s Matrix This model (Figure VIII) focuses on the firm’s present and potential products and markets and provides four different growth strategies – market penetration and market development (for the existing products), product development and diversification (for new product development)18. Market penetration is the least risky strategy as it is based on the resources and capabilities that the firm already has. Market development requires additional research or developing new target segments or geographical areas. Product development is a customer-focused strategy where the demands of the customers have to be met and diversification pertains to both product and market development. Figure VIII 2.2.8 BCG Growth-Share Matrix This form of strategic analysis is used by strategic business units when they face the challenge of allocating resources among the units. This allows comparing several business units at a glance. Developed by the Boston Consulting Group (BCG) for managing a portfolio of different business units, this matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors (Figure IX)19. Cash cows require little investment as their market share is good and they can even invest in other units. Star indicates that cash flow is good, market share is good but since it is in a fast growing industry, cash would be required for fresh investments. The Question Mark refers to a business unit that has a small market share in a high growth market. These business units require resources to grow and may or may not become stars. Dog has a small market share in a mature industry. While it may not require cash but it ties up substantial cash which may be better deployed elsewhere. Figure IX Strategic analysis has to be an ongoing process because the external and internal environment has to be monitored continuously. There are different tools and techniques to aid the decision makers at different levels and fort different purposes. Strategic analysis helps to identify the oppurtunities and neutralize the threats thereby enabling competitive advantage. 2.3 SME according to EU and Poland The SMEs represent 99% of all enterprises in Europe and they contribute to more than two-thirds of the European GDP providing 75 million jobs20. According to the EU, an organization is an SME if it employs over 50 people and its turnover is in excess of €10mn. This was the revised criteria (Appendix A) in 2005 after considering the economic development since 199621. The financial ceilings were raised in 2005 to take into account the price and productivity increases. The revised definition also included a typology of enterprises (difference between the three categories: autonomous, partner and linked). It also clarified that enterprises that are part of a larger group, which could receive strong economic backing, do not fall under the purview of an SME. They hence, do not benefit from the SME support schemes. Poland stared undergoing economic transformation in 1988 when the Act on Business Activity was established. This was not directly on the SMEs but the entrepreneurs could start their own firm without any government obstacles. The government had removed the administrative barriers for private enterprises. While the activities of the entrepreneurs in the SMEs were favoured, the government did not grant any priority to this sector. The SMEs in Poland contributed to the economy as it employed 61.1% of the people22. They contributed to the Poland GDP and employed more than half of the working population thereby demonstrating the importance of the sector for the economy. By 2002, the Polish SMEs represented 99.8% of all active enterprises. 2.3.1 Barriers to development The existence of entrepreneurial talent and the influence of the cultural and the social environment determine the success of the SMEs. In Poland, however, cultural influence did not impact the entrepreneurial ability. As the government took liberalization steps, rapid increase in private activity was recorded. The barriers to the growth of the SMEs in Poland was the lack of human capital with marketing or business management know-how, lack of the various HR functions including motivation and training and development of the employees and lack of qualified managers23. Lack of competition in the industries also did not motivate the entrepreneurs to exert efforts. State bureaucracy and administration served to deter the entrepreneurs who found difficulties in applying the new economic laws. Even the state employees were unable to deal with the new economic legislation. All these contributed to stressed relations between the state employees and the commercial sector. The SMEs lacked the necessary finance to fund operations and the access to capital from banks and financial institutions was limited. Lack of risk capital overall affected the smooth functiong of the SMEs. Te new banks in Poland did not have the adequate equity capital and were unwilling or unable to service their loans. At the regional level, the banks did not have proper infra structure to service clients. Strategy planning does not provide much of benefit to the SMEs. The managers are aware of strategy formulation but formal strategic plans merely remain on paper24. In a study of the electronics and engineering sectors in the UK, it as found that they do not have written strategy plans. The subsidiary firms are more likely to have formal plans than the independent firms. This is because the managers in the SMEs could not specify their goals and plans, and they do not even make references to the resources necessary. This implies that managers do not have the orientation towards strategic planning and rely on the entrepreneur style of management. Besides, they do not have goals and corporate mission which would motivate them to formalize their strategy. The survival of small businesses depends upon the external environment. The SMEs cannot influence the environment because they are less powerful and formal planning for them is less significant. According to Porter, if entrepreneurship remain unguided by strategic perspective, it is likely to fail25. The entrepreneurial environment is uncertain and the models like PEST or STEP analysis, the implementation plan (effective only in stable environments) and discovery-driven planning (enables testing assumptions against likely levels) all fail to achieve results. This is because the start-up conditions are unique to the organization. Planning thus becomes futile and the strategies have been found to be inadequate. SMEs cannot rely on forecast and prepare strategies, because the environment they operate in is turbulent. SMEs need to have strategies that are robust (when survival is important) and flexible (when change becomes imminent). They may adopt the butterfly approach to see what suits their needs or the lottery approach if they look at business involvement as a gamble. The SMEs thus seek direction as they evolve rather than formalized plans. To facilitate the growth of the SMEs, the EU has brought together banks and small business organizations to reduce the barriers that SMEs encounter26. The financial institutions also help SMEs raise equity and debt finance. The EC has also attempted to raise awareness of such funding that is available to the SMEs. Apart from the loans and guarantees, structural funds are also available in the form of seed capital fund. Grants are available at specific policy objectives like research or education. The EC has also created tools for analysis and monitoring of the situation and the barriers that the SMEs face when trying to access finance. Bibliography Aldehayyat, J. S., & Anchor, J. R. (2008) Strategic planning tools and techniques in Jordan: awareness and use, Strat. 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Strategic management. [Online] access from 11 February 2010 Quickmba. (2007c) ANSOFF Matrix. Strategic management. [Online] access from 11 February 2010 Quickmba. (2007d) BCG Growth-Share Matrix. Strategic management. [Online] access from 11 February 2010 Williams, W., & Lewis, D. (2008) STRATEGIC MANAGEMENT TOOLS AND PUBLIC SECTOR MANAGEMENT. Public Management Review. 10 (5), 653-671 Appendix A Criteria for an SME in the EU Enterprise category Headcount Turnover or Balance sheet total medium-sized < 250 ≤ € 50 million ≤ € 43 million small < 50 ≤ € 10 million ≤ € 10 million micro < 10 ≤ € 2 million ≤ € 2 million Source: EC (2009) Read More